## Facts

- UPS offered customers coverage for package value above $100 in exchange for an “excess-value charge” (25¢ per additional $100 of declared value).
- Before 1984, UPS retained the excess-value charges, processed and paid claims, earned substantial profits on the program, and reported the profits as taxable income.
- In 1984, UPS reorganized the program by forming a Bermuda subsidiary, Overseas Partners Ltd. (OPL), capitalizing it, and distributing most OPL shares to UPS shareholders as a taxable dividend.
- UPS purchased an insurance policy from an unrelated insurer, National Union Fire Insurance Company, under which National Union assumed the risk of loss for excess-value shipments; the “premiums” were the excess-value charges UPS collected.
- National Union entered a reinsurance treaty with OPL under which OPL assumed National Union’s risk in exchange for premiums substantially equal to the amounts National Union received (net of commissions, fees, and excise taxes).
- Despite continued collection of charges and administration of claims by UPS, the restructuring redirected the net excess-value charges away from UPS and ultimately to OPL.
- The Commissioner determined an income tax deficiency and penalties, asserting the restructuring lacked economic substance and that the excess-value charges remained taxable to UPS.
- The Tax Court agreed with the Commissioner, treated the structure as lacking substantive effect for tax purposes, and held UPS liable for additional taxes and penalties.

## Issues

1. Whether the 1984 insurance/reinsurance restructuring should be disregarded as a sham lacking economic substance so that excess-value charges remained taxable income to UPS.
2. Whether routing the excess-value revenue stream through National Union and OPL constituted an impermissible assignment of income requiring reallocation of income to UPS.

## Decision

- The Eleventh Circuit reversed the Tax Court and remanded.
- The court held the restructuring was not a sham because it produced real economic effects and served a business purpose, even if tax reduction was a major motive.
- The court concluded the Tax Court erred by disregarding the transaction’s form and recharacterizing the excess-value charges as UPS income.
- The court treated the involvement of an unrelated insurer and the existence and operations of OPL as supporting recognition of the arrangement’s legal and economic consequences.

## Legal Principles

- A transaction is not disregarded for tax purposes solely because it is tax-motivated; it may be respected if it has economic substance and a non-tax business purpose.
- Courts generally respect corporate form and separateness absent grounds to disregard the entity; the use of separate corporations and contracts can have tax effect when they impose genuine obligations and shift risk in fact.
- Substance-over-form analysis does not authorize recharacterization where the chosen structure has real-world consequences and is not fictitious or merely paper.
- Assignment-of-income reallocation is not automatic where income is earned under a bona fide, risk-bearing contractual arrangement implemented through separate, operative entities.

## Conclusion

The Eleventh Circuit held that UPS’s 1984 excess-value insurance and reinsurance arrangement, involving an unrelated insurer and a Bermuda affiliate that assumed risk, had sufficient economic substance and business purpose to be respected for tax purposes; the Tax Court’s deficiency and penalty determinations were reversed and the case remanded.


United Parcel Serv. of Am., Inc. v. Comm’r, 254 F.3d 1014 (11th Cir. 2001)